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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From              to

Commission file number: 001-38677

 

Ra Medical Systems, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

38-3661826

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

2070 Las Palmas Drive

Carlsbad, California

 

92011

(Address of principal executive offices)

 

(Zip Code)

 

(760) 804-1648

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

RMED

 

NYSE American

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

  

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of August 9, 2021, the registrant had 7,029,438 shares of common stock, par value $0.0001 per share, outstanding.

 


 

 

RA MEDICAL SYSTEMS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Page

 

Item 1.

  

Financial Statements:

 

3

 

 

  

Condensed Balance Sheets (unaudited)

 

3

 

 

  

Condensed Statements of Operations (unaudited)

 

4

 

 

 

Condensed Statements of Comprehensive Loss (unaudited)

 

5

 

 

 

Condensed Statements of Cash Flows (unaudited)

 

6

 

 

  

Condensed Statements of Stockholders’ Equity (unaudited)

 

7

 

 

  

Notes to Condensed Financial Statements (unaudited)

 

8

 

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

 

28

 

Item 4.

  

Controls and Procedures

 

29

 

PART II. OTHER INFORMATION

 

30

 

Item 1.

  

Legal Proceedings

 

30

 

Item 1A.

  

Risk Factors

 

32

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

 

80

 

Item 3.

  

Defaults Upon Senior Securities

 

80

 

Item 4.

  

Mine Safety Disclosures

 

80

 

Item 5.

  

Other Information

 

80

 

Item 6.

  

Exhibits

 

81

 

SIGNATURES

 

82

 

 

 

 

2


 

 

 

PART I — FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Ra Medical Systems, Inc.

Condensed Balance Sheets

(Unaudited)

(in thousands, except share and per share data)

 

 

 

June 30,

2021

 

 

December 31,

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

20,220

 

 

$

23,906

 

Accounts receivable, net

 

 

228

 

 

 

238

 

Inventories

 

 

2,323

 

 

 

2,218

 

Prepaid expenses and other current assets

 

 

1,306

 

 

 

1,258

 

Total current assets

 

 

24,077

 

 

 

27,620

 

Property and equipment, net

 

 

2,661

 

 

 

3,211

 

Operating lease right-of-use-assets

 

 

2,300

 

 

 

2,484

 

Other non-current assets

 

 

121

 

 

 

123

 

TOTAL ASSETS

 

$

29,159

 

 

$

33,438

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,077

 

 

$

571

 

Accrued expenses

 

 

2,021

 

 

 

4,348

 

Current portion of deferred revenue

 

 

1,787

 

 

 

1,801

 

Current portion of equipment financing

 

 

 

 

 

265

 

Current portion of promissory note

 

 

 

 

 

421

 

Current portion of operating lease liabilities

 

 

320

 

 

 

356

 

Total current liabilities

 

 

5,205

 

 

 

7,762

 

Deferred revenue

 

 

566

 

 

 

686

 

Promissory note

 

 

 

 

 

1,579

 

Operating lease liabilities

 

 

2,125

 

 

 

2,264

 

Total liabilities

 

 

7,896

 

 

 

12,291

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 10,000,000 authorized; none issued

 

 

 

 

 

 

Common stock, $0.0001 par value, 300,000,000 shares authorized; 5,902,612 and 3,188,679 issued and outstanding at June 30, 2021 and December 31, 2020, respectively

 

 

7

 

 

 

7

 

Additional paid-in capital

 

 

186,943

 

 

 

174,342

 

Accumulated deficit

 

 

(165,687

)

 

 

(153,202

)

Total stockholders’ equity

 

 

21,263

 

 

 

21,147

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

29,159

 

 

$

33,438

 

 

See notes to condensed financial statements.

 

3


 

 

Ra Medical Systems, Inc.

Condensed Statements of Operations

(Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

318

 

 

$

154

 

 

$

724

 

 

$

740

 

Service and other

 

 

687

 

 

 

746

 

 

 

1,399

 

 

 

1,534

 

Total net revenue

 

 

1,005

 

 

 

900

 

 

 

2,123

 

 

 

2,274

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

 

861

 

 

 

624

 

 

 

1,651

 

 

 

1,588

 

Service and other

 

 

627

 

 

 

543

 

 

 

1,210

 

 

 

1,163

 

Total cost of revenue

 

 

1,488

 

 

 

1,167

 

 

 

2,861

 

 

 

2,751

 

Gross loss

 

 

(483

)

 

 

(267

)

 

 

(738

)

 

 

(477

)

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

3,741

 

 

 

7,896

 

 

 

7,855

 

 

 

14,181

 

Research and development

 

 

3,018

 

 

 

1,953

 

 

 

5,834

 

 

 

3,248

 

Total operating expenses

 

 

6,759

 

 

 

9,849

 

 

 

13,689

 

 

 

17,429

 

Operating loss

 

 

(7,242

)

 

 

(10,116

)

 

 

(14,427

)

 

 

(17,906

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on extinguishment of debt

 

 

2,023

 

 

 

 

 

 

2,023

 

 

 

 

Interest income

 

1

 

 

10

 

 

2

 

 

124

 

Interest expense

 

 

(31

)

 

 

(15

)

 

 

(83

)

 

 

(40

)

Total other income (expense), net

 

 

1,993

 

 

 

(5

)

 

 

1,942

 

 

 

84

 

Loss before income tax expense

 

 

(5,249

)

 

 

(10,121

)

 

 

(12,485

)

 

 

(17,822

)

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(5,249

)

 

$

(10,121

)

 

$

(12,485

)

 

$

(17,822

)

Basic and diluted net loss per share

 

$

(1.28

)

 

$

(10.71

)

 

$

(3.56

)

 

$

(23.83

)

Basic and diluted weighted average common shares

   outstanding

 

 

4,089

 

 

 

945

 

 

 

3,506

 

 

 

748

 

 

See notes to condensed financial statements.

 

 


4


 

 

Ra Medical Systems, Inc.

Condensed Statements of Comprehensive Loss

(Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net loss

 

$

(5,249

)

 

$

(10,121

)

 

$

(12,485

)

 

$

(17,822

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses related to short-term investments

 

 

 

 

 

(4

)

 

 

 

 

 

(26

)

Total other comprehensive loss

 

$

 

 

$

(4

)

 

$

 

 

$

(26

)

Comprehensive loss

 

$

(5,249

)

 

$

(10,125

)

 

$

(12,485

)

 

$

(17,848

)

 

See notes to condensed financial statements.

 

5


 

 

Ra Medical Systems, Inc.

Condensed Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(12,485

)

 

$

(17,822

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Gain on extinguishment of debt (promissory note)

 

 

(2,023

)

 

 

 

Depreciation and amortization

 

 

881

 

 

 

1,214

 

Provision for doubtful accounts

 

 

 

 

 

25

 

Stock-based compensation

 

 

1,865

 

 

 

2,080

 

Gain on sale of property and equipment

 

 

(493

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

10

 

 

 

287

 

Inventories

 

 

(108

)

 

 

33

 

Prepaid expenses and other assets

 

 

(46

)

 

 

650

 

Accounts payable

 

 

368

 

 

 

107

 

Accrued expenses

 

 

(2,359

)

 

 

1,295

 

Deferred revenue

 

 

(134

)

 

 

(556

)

Other liabilities

 

 

(175

)

 

 

(156

)

Net cash used in operating activities

 

 

(14,699

)

 

 

(12,843

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from maturities of available-for-sale securities

 

 

 

 

 

16,000

 

Proceeds from sale of property and equipment

 

 

534

 

 

 

 

Purchases of property and equipment

 

 

(76

)

 

 

(49

)

Net cash provided by investing activities

 

 

458

 

 

 

15,951

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock and warrants, net of placement agent fees of $351 and $1,008, respectively

 

 

11,022

 

 

 

8,992

 

Proceeds from issuance of common stock in connection with the exercise of warrants

 

 

 

 

 

827

 

Proceeds from issuance of common stock in connection with the employee stock purchase plan

 

 

26

 

 

 

27

 

Proceeds from PPP promissory note

 

 

 

 

 

2,000

 

Payments on equipment financing

 

 

(265

)

 

 

(145

)

Payments of offering costs related to the issuance of common stock and warrants

 

 

(228

)

 

 

(13

)

Net cash provided by financing activities

 

 

10,555

 

 

 

11,688

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(3,686

)

 

 

14,796

 

CASH AND CASH EQUIVALENTS, beginning of period

 

 

23,906

 

 

 

14,584

 

CASH AND CASH EQUIVALENTS, end of period

 

$

20,220

 

 

$

29,380

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND

   FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Unpaid offering costs

 

$

84

 

 

$

231

 

Transfer from inventories to property and equipment for lasers

 

$

3

 

 

$

40

 

Unpaid property and equipment

 

$

109

 

 

$

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash payments for interest

 

$

2

 

 

$

16

 

Cash payments for taxes

 

$

2

 

 

$

 

 

See notes to condensed financial statements.

 

6


 

 

Ra Medical Systems, Inc.

Condensed Statements of Stockholders’ Equity  

(Unaudited)

(in thousands)

 

 

 

 

 

Common

Stock

Shares

 

 

Common

Stock

Amount

 

 

Additional

Paid- in-

Capital

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Total

Stockholders’

Equity

 

Balances at December 31, 2020

 

 

3,189

 

 

$

7

 

 

$

174,342

 

 

$

 

 

$

(153,202

)

 

$

21,147

 

Common stock issued, net

 

 

35

 

 

 

 

 

 

65

 

 

 

 

 

 

 

 

 

65

 

Stock-based compensation

 

 

35

 

 

 

 

 

 

1,169

 

 

 

 

 

 

 

 

 

1,169

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,236

)

 

 

(7,236

)

Balances at March 31, 2021

 

 

3,259

 

 

$

7

 

 

$

175,576

 

 

$

 

 

$

(160,438

)

 

$

15,145

 

Common stock issued, net

 

 

2,582

 

 

 

 

 

 

10,645

 

 

 

 

 

 

 

 

 

10,645

 

Common stock issued pursuant to the vesting of restricted stock units and ESPP

 

 

6

 

 

 

 

 

 

26

 

 

 

 

 

 

 

 

 

26

 

Stock-based compensation

 

 

56

 

 

 

 

 

 

696

 

 

 

 

 

 

 

 

 

696

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,249

)

 

 

(5,249

)

Balances at June 30, 2021

 

 

5,903

 

 

$

7

 

 

$

186,943

 

 

$

 

 

$

(165,687

)

 

$

21,263

 

 

 

 

 

Common

Stock

Shares

 

 

Common

Stock

Amount

 

 

Additional

Paid- in-

Capital

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Total

Stockholders’

Equity

 

Balances at December 31, 2019

 

 

551

 

 

$

1

 

 

$

150,280

 

 

$

26

 

 

$

(117,157

)

 

$

33,150

 

Common stock issued

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,047

 

 

 

 

 

 

 

 

 

1,047

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(22

)

 

 

 

 

 

(22

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,701

)

 

 

(7,701

)

Balances at March 31, 2020

 

 

556

 

 

$

1

 

 

$

151,327

 

 

$

4

 

 

$

(124,858

)

 

$

26,474

 

Common stock issued, net

 

 

889

 

 

 

2

 

 

 

5,282

 

 

 

 

 

 

 

 

 

5,284

 

Warrants issued, net

 

 

 

 

 

 

 

 

3,464

 

 

 

 

 

 

 

 

 

3,464

 

Exercise of warrants

 

 

73

 

 

 

1

 

 

 

826

 

 

 

 

 

 

 

 

 

827

 

Common stock issued pursuant to the vesting of restricted stock units and ESPP

 

 

9

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

27

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,033

 

 

 

 

 

 

 

 

 

1,033

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

 

(4

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,121

)

 

 

(10,121

)

Balances at June 30, 2020

 

 

1,527

 

 

$

4

 

 

$

161,959

 

 

$

 

 

$

(134,979

)

 

$

26,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed financial statements.

7


 

Ra Medical Systems, Inc.

Notes to Condensed Financial Statements

(Unaudited)

Note 1—Organization and Nature of Operations

Ra Medical Systems, Inc. (the “Company”) was formed on September 4, 2002, in the state of California and reincorporated in Delaware on July 14, 2018. The Company is a medical device company that develops and manufactures advanced excimer laser systems for use in the treatment of vascular and dermatological diseases. The Company’s product development centers around proprietary applications of its advanced excimer laser technology for use as a tool in the treatment of peripheral artery disease (“PAD”) and psoriasis, vitiligo, atopic dermatitis and leukoderma.     

Reverse Stock SplitOn November 16, 2020, the Company filed a certificate of amendment to the Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a reverse stock split of the Company’s common stock at a ratio of one-for-twenty-five (“Reverse Stock Split”). The Reverse Stock Split became effective as of 4:01 p.m. Eastern time on November 16, 2020, and the Company’s common stock began trading on the New York Stock Exchange (“NYSE”) on a post-split basis on November 17, 2020. Unless otherwise noted, all share and per share numbers contained in these financial statements are reflected on a post-split basis.

COVID-19The global spread of the novel coronavirus (COVID-19) has created significant volatility, uncertainty and economic disruption. The ultimate effects of the COVID-19 on the Company’s business, operations and financial condition are unknown at this time. In the near term, the Company expects that its revenue will continue to be adversely impacted and enrollment in its atherectomy clinical trial will continue to be delayed or slowed, as patients elect to postpone voluntary treatments and many physicians’ offices have been either closed or operating at a reduced capacity. In addition, some customers are requesting more flexible payment terms on a temporary basis. The Company’s manufacturing facility located in Carlsbad, California is currently operational. The Company has experienced delays in receiving shipments of certain parts, which has affected the timing of its key engineering efforts. To date, the delays have not materially impacted the Company’s ability to support its atherectomy indication clinical trial. However, the extent to which COVID-19 impacts its business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain it or treat its impact, among others. 

Going Concern —The Company has experienced recurring net losses from operations and negative cash flows from operating activities, has a significant accumulated deficit and expects to continue to incur net losses into the foreseeable future. The Company had an accumulated deficit of $165.7 million at June 30, 2021. For the year ended December 31, 2020 the Company used $28.3 million in cash for operating activities.

As of June 30, 2021, the Company had cash and cash equivalents of $20.2 million. 

Management expects operating losses and negative cash flows to continue for the foreseeable future with the Company’s reduced commercial footprint, and as the Company continues to incur costs related to its atherectomy clinical trial, engineering efforts to improve the shelf life of its catheters and develop next generation products and legal costs associated with ongoing litigation. In September 2020, the Company paused commercial sales of DABRA catheters not being used for the atherectomy clinical trial while it conducted further studies on the stability of its shelf life. The Company submitted additional test data with respect to the DABRA catheter shelf life in March 2021, which was cleared by the FDA in July 2021. Although eligible, the Company has not resumed commercial shipments and is evaluating its commercial catheter strategy.  The Company also expects the COVID-19 pandemic to have a continued negative impact on its revenue and the timing of enrollment in its atherectomy clinical trial as well as the Company’s ability to secure additional financing in a timely manner or on favorable terms, if at all.

Management believes that based on the Company’s liquidity resources, there is substantial doubt about the Company’s ability to continue as a going concern for a period of at least 12 months from the date of issuance of the financial statements.

Although the Company bolstered its liquidity resources in 2020 and 2021, it has an effective shelf registration statement and an “at the market” offering to allow it to raise additional capital when the opportunities permit and may receive additional funds from the exercise of its warrants depending on market conditions, management concluded that the aforementioned conditions, including the ongoing uncertainty related to the negative impacts of the COVID-19 pandemic, continue to raise substantial doubt about the Company’s ability to continue as a going concern for a period of at least 12 months from the date of issuance of the financial statements. Management plans to address this uncertainty by raising additional funds, if necessary, through public

8


 

or private equity or debt financings as well as by engaging in regular and ongoing reviews of our business model and strategic options to help ensure that the Company is focusing its cash resources on advancing its key corporate initiatives. However, the Company may not be able to secure such financing in a timely manner or on favorable terms, if at all. Furthermore, if the Company issues equity securities to raise additional funds, its existing stockholders may experience dilution, and the new equity securities may have rights, preferences and privileges senior to those of the Company’s existing stockholders.

The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result from the outcome of this uncertainty.  

Note 2—Significant Accounting Policies

Interim condensed financial information—The unaudited interim condensed financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments of a normal and recurring nature that are necessary for the fair presentation of the Company’s condensed balance sheets, results of operations, cash flows and statements of stockholders’ equity for the periods presented. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 or for any other future annual or interim period. The balance sheet as of December 31, 2020 included herein was derived from the audited financial statements as of that date. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC on March 17, 2021.

Use of estimates—The financial statements of the Company have been prepared by management in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and reported disclosures of contingent liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. The Company’s financial statements are based upon a number of estimates, including but not limited to, allowance for doubtful accounts, evaluation of impairment of assets, reserves for warranty costs including product recalls, evaluation of probable loss contingencies, fair value of stock option awards granted and revenue recognition for multiple performance obligations.  

Fair value measurementsFair value represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants and is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier value hierarchy is used to identify inputs used in measuring fair value as follows:

Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—Inputs other than the quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and

Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.

The hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

The Company measures its cash and cash equivalents and short-term investments at fair value.

Inventories—Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Cost includes materials, labor and manufacturing overhead related to the purchase and production of inventories. The Company reduces the carrying value of inventories for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technological developments or other economic factors.

9


 

Catheters are manufactured in-house and each catheter is tested at various stages of the manufacturing process for adherence to quality standards. Catheters that do not meet functionality specification at each test point are destroyed and immediately written off, with the expense recorded in cost of revenue in the statements of operations. Once manufactured, completed catheters that pass quality assurance, are sent to a third-party for sterilization and sealed in a sterile container. Upon return from the third-party sterilizer, a sample of catheters from each batch are re-tested. If the sample tests are successful, the batch is accepted into finished goods inventory and if the sample tests are unsuccessful, the entire batch is written off, with the expense recorded in cost of revenue in the statements of operations.

Revenue—The Company generates revenue from the sale of products and services. Product sales consist of the sale of Pharos laser systems, the sale of catheters for use with the DABRA laser, and the sale of consumables and replacement parts. The Company’s vascular segment has paused selling commercial product and is only selling catheters for use in the Company’s atherectomy clinical trial. The Company’s sales agreements generally do not include right-of-return provisions for any form of consideration including partial refund or credit against amounts owed to the Company. Services and other revenue primarily consist of sales of extended warranty and billable services, including repair activity and income from rental of lasers.

Catheter Revenue

When engaged in commercial sales, the Company enters into a DABRA laser commercial usage agreement or DABRA laser placement acknowledgement with each customer that is supplied a DABRA laser, collectively the “usage agreement”. The usage agreement provides for specific terms of continued use of DABRA laser, including a nominal periodic fee. The terms of a usage agreement typically allow the Company to place a DABRA laser at a customer’s specified location without a specified contract term. Under the usage agreement terms, the Company retains all ownership rights to the DABRA laser and is permitted to request the return of the equipment within 10 business days of notification. While the laser periodic fees are nominal, the laser usage agreements provide the Company the exclusive rights to supply related single-use catheters to the customer which aggregate the majority of the vascular segment revenue. There are no specified minimum purchase commitments for the catheters.

The Company recognizes revenue associated with the usage agreement and catheter supply arrangements in accordance with Topic 606 as the contract primarily includes variable payments, the catheters are priced at their standalone selling price and the laser equipment is insignificant in the context of the contract. Revenue is recognized when the performance obligation is satisfied, which is generally upon shipment of the catheter.  

Laser Sales

Sales of laser systems are included in product sales in the statements of operations. The Company recognizes revenue on laser sales at the point in time that control transfers to the customer. Control of the product typically transfers upon shipment.

Warranty Service Revenue

The Company typically provides a 12-month warranty with the purchase of its laser systems. Customers can extend the warranty period through the purchase of extended warranty service contracts. Extended warranty service contracts are sold with contract terms ranging from 12 to 60 months and cover periods after the end of the initial 12-month warranty period. The warranty provides the customer with maintenance services in addition to the assurance that the laser product complies with agreed-upon specifications. Therefore, the warranty service is treated as a separate performance obligation from the laser system. Warranty services are a stand-ready obligation, and the Company recognizes revenue on a straight-line basis over the service contract term. Warranty service revenue is included in service and other revenue in the statements of operations. Deferred revenue at January 1, 2021 and 2020 was $2.5 million and $3.3 million, respectively. Revenue recognized in each of the three months ended June 30, 2021 and 2020 relating to amounts previously included in deferred revenue was $0.5 and $0.6 million, respectively. Revenue recognized in each of the six months ended June 30, 2021 and 2020 was $1.1 million and $1.3 million, respectively. The deferred revenue greater than one year will be recognized during the remaining service period through 2024. As of June 30, 2021 and 2020, deferred revenue greater than one year was $0.5 million and $0.8 million, respectively.

Distributor Transactions

In certain markets outside the U.S., the Company sells products and provides services to customers through distributors that specialize in medical device products. The terms of sales transactions through distributors are generally consistent with the terms of direct sales to customers. The Company accounts for these transactions in accordance with the Company’s revenue recognition policy described herein.

Contract Costs

The Company capitalizes costs to obtain contracts that are considered incremental and recoverable, such as sales commissions. The capitalized costs are amortized to selling, general and administrative expense over the estimated period of benefit of the asset, which is the contract term. The Company elected to use the practical expedient to expense the costs to obtain a contract

10


 

when the amortization period is less than one year. The Company has contract costs of $0.2 million capitalized at June 30, 2021 and December 31, 2020.

Rental Income

The Company also derives income pursuant to product lease agreements for its Pharos laser systems, as operating leases. Consequently, the Company retains title to the equipment and the equipment remains on Company’s balance sheet within property and equipment. Depreciation expense on these leased lasers is recorded to cost of revenues on a straight-line basis. The costs to maintain these leased lasers are charged to cost of revenues as incurred.

These lease arrangements contain one lease component (the laser) and one nonlease component (warranty service) for which the Company elected the practical expedient to not separate the nonlease component from the lease component. The Company accounts for the combined lease component as an operating lease and recognizes lease income on a straight-line basis over the lease term. Rental income from lease arrangements was $0.1 for each of the three months ended June 30, 2021 and 2020. Rental income from lease arrangements for each of the six months ended June 30, 2021 and 2020 was $0.3 million.   

 

Note 3—Fair Value Measurements

The following table presents the hierarchy for assets measured at fair value on a recurring basis (in thousands):

 

 

 

Total Fair

Value

 

 

Quoted

Market

Prices for

Identical

Assets

(Level 1)

 

 

Other

Observable

Inputs

(Level 2)

 

 

Unobservable

Inputs

(Level 3)

 

As of June 30, 2021